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The-money-pie-budgetHow to Set up a Budget

It’s so easy to get frustrated with our personal and household budgets. After all, who wants to categorize every single expense, estimate them months into the future, only to find out (it always seems) that your income is insufficient to meet your expenses. That stinks more than that moldy green stuff (that had once been fancy-smelling cheese) you once found in the bottom drawer of your fridge back in your 20’s.

So for all those who seek simplicity in life, I humbly present “The Money Pie.” This concept is not new, and I did not invent it, but I did create the name and the graphic :-).

  • GIVE 10%: Be Generous
  • LIVE on 50%: Home, Clothing, Communication, Food, Transportation
  • PREPARE with 10%: Save for emergencies and short-term (1-3 years) goals
  • PLAN with 10%: Investing for retirement, a business start-up, or a down payment on a home
  • IMPROVE with 10%: Your own education or your child’s, business startup, or job-related training and continuing education
  • FUN with 10%: Whatever peaks your curiosity or fits your fancy

The first key is keeping our survival living expenses (“Live”) to 50% of our net income. If that’s not possible right now, make it a goal to either increase income (not expenses), decrease expenses, or both. The second and most important key is keeping ALL the other expenses to 90% of your net income so that you can splurge every month with 10% of your money (“Fun”).

Here’s an example of a household earning $27,000 gross a year and netting $23,000 (approximately $13/hour). The monthly net income is approximately $1,915.

Expense % of Net Income Amount per Month Uses
Give 10% $191.50 In Cash or Check

  • Donate to Charity
  • Donate to Church
  • Donate to Cause
  • Help Out a Friend/Neighbor/Stranger
Live 50% $957.50 In Checking Account

  • Housing (Rent & Utilities)
  • Food
  • Transportation
  • Phone
  • Clothing
Prepare 10% $191.50 In Savings Account

  • Replace Appliances or Furniture
  • Repair or Replace Vehicle
  • Medical Emergency
  • Vacation
  • Gift Giving (Birthdays, Christmas, etc.)
Plan 10% $191.50 In Retirement Account (401k, IRA, etc.)

  • Retirement and Long-term Goals
Improve 10% $191.50 In Savings Account

  • Formal Education
  • Start up a business
  • Trainings of Interest
Fun 10% $191.50 In Cash or Check or Debit

  • Fun
  • Recreation
  • Entertainment
  • Dining Out

 

So just figure out your own money pie and dig in, right?!

Okay, so it can be a bit more involved than that. Actually, once you “figure out your figures,” you should start to send the amounts automatically to the right accounts.

  • “Give” and “Live” (and possibly “Fun”) go into your checking account. Take advantage of bill pay or a business’ direct debit option to automate as many of your “Live” and “Give” expenses as possible.
  • Set up automatic transfers for your “Prepare” and “Improve” categories so that money flows automatically into your savings account(s).
  • For “Plan,” consider using a second and/or third direct deposit option through your employer so that this money never even goes into your checking account. Otherwise, set up an automatic transfer out of your checking and into your investment account soon after each payday.
  • Consider taking your “Fun” money and perhaps some of your “Live” expenses (gasoline and groceries) out in cash to spend as you so choose.

And remember to get your credit and debit cards and even your checkbook OUT of your wallet or purse, especially if you would not classify yourself as a particularly disciplined person when it comes to money (and if you’re among the 60% of Americans who live paycheck-to-paycheck or worse, you’re almost in that category by default).

At this point, I’m sure many are asking, “How am I supposed to ‘LIVE’ on 50% of my income?! That’s impossible!” Not impossible, but not easy either. The reality is that at many lower- and even some medium-income levels, we can’t live like we think we “deserve.” Having a $400 car payment when you’re bringing in just $2,000 a month net is a bad idea. Yet I can’t tell you how many people I meet are in a similar (or worse) situation. They get into an apartment, a car payment or two, and massive cell phone plans, and then they wonder why they can never seem to save anything for the future.

Reality Check Time!

  • If your basic monthly living expenses as listed above are 70% or more of your monthly net income, you’re headed for trouble (but you probably already know that).
  • If they’re between 50% and 70%, you’ll likely have trouble staying out of consumer debt and getting much into savings or investment accounts.
  • If you’re living on less than 50% of your income, you may either be trying to catch up from years of “savings neglect.” Be careful, though, that you not live on so little that your basic needs and wants (and those of your household members) frequently go unmet.

Living on 50% of our income really is the key, and I would bet you that you’ll be a happier person, couple and/or family living in a smaller home, driving a car that’s not brand new, and talking on a phone that uses 3G than you are with a big rent/mortgage payment, a new car payment, and a 4G unlimited cell-phone bill. Why, because if you’re living paycheck-to-paycheck, you’ll have difficulty finding ANY available cash to experience the fulfilling satisfaction of giving to causes you really care about, or to fund your interests, hobbies, and pleasures, which is where much of our satisfaction and happiness comes from in life… even if they include fancy-smelling cheeses.

Okay, NOW, bon appetit!

todd-christensen-portraitTodd Christensen
Everyday Money for Everyday People
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  1. Sheila White

    I like the concept. We need to reduce our ‘fun’ part of the pie by selling our timeshare. Any suggestions ? The interest rate is 14%. I could pay it off with a fixed rate credit card. ( we have good credit) but would lose the tax write off on the interest. We’d like to sell it; have someone just take over the payments, we don’t know where to list it. Thank you for any suggestions you may have.

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